Bitcoin News, Analysis, Interviews and Features

Bitcoin 101, part 1

Thursday 02 June 2016

I was recently asked to explain bitcoin to a newcomer, start to finish. So that’s what I’m going to do… bit by bit.

I’ve been immersed in the crypto scene for two and a half years now, and I’ve picked up a fair amount of information (which, to be fair, is kind of my job). The real test of understanding something, though, isn’t what you know: it’s how good you are at communicating it to others. As one of my friends once said, ‘If you can explain your PhD thesis to your supervisor, you know your subject well. If you can explain it to the guy at the bar, then you really know what you’re talking about.’

If bitcoin and other forms of digital cash are really as compelling a proposition as we at BitScan believe they are, we should be able to explain why - even to people who have never heard of them before or, worse still, have only seen the misinformation the mainstream media seem to put out on a regular basis.

Peruse BitScan’s article archive through the handy instant-search widget at the bottom of the page and you’ll find plenty of material about almost every aspect of crypto. But I guess that almost all of this presumes some kind of background in the subject: that the light from the entrance to the rabbit hole is already behind you. And so, whilst drawing on this in the coming weeks and months, I want to start right at the very beginning, square 1, and go from there.

Bitcoin is a lot like handing over cash - only online

Bitcoin, Square One

When I hand you $10 in cash, that is a direct transaction. It’s just you and me.

When I send you $10 through the banking system, it’s not just you and me any more. I’m not really even giving you money. What I’m doing is asking the bank to deduct $10 from my balance and add $10 to your account.

The bank will probably do just that. But it might not. It reserves the right to refuse, for a variety of reasons. And it might take a couple of working days to do it, and it might charge me one way or another for the privilege. But that’s the way we do things.

There’s a good reason for that. You need a bookkeeper when you send money online, because it’s not like handing over $10 in person. If I give you a $10 bill then I don’t have that $10 bill any more. But digital information can easily be copied (just ask the music industry when file-sharing started taking off around 15 years ago), so I could send you a file that somehow represents $10, but if I didn’t delete that file, I’d still have it and could send it to someone else, and someone else, and...

You can’t trust me, so you trust the bank to keep accounts for both of us. If you’re handling cash in the real world it’s one thing. If you’re doing it online, you need that central authority figure, a source of truth, because otherwise it’s impossible to know who really owns what.

Until, that is, bitcoin came along.

The genius of bitcoin was that it solved that so-called ‘double spend’ problem. How it does that is a subject for another time. For now, we’ll say that bitcoin allows you to give me $10 over the internet, just like you were handing me $10 in person. No bank or other authority is necessary. Just you and me, even if we’re on different sides of the planet.

There’s a lot more to bitcoin. All kinds of stuff about mining and exchanges and wallets and private keys and regulation and tax and more than you ever wanted to know. But everything about bitcoin - everything that is good or bad, controversial, groundbreaking, threatening or exciting - comes down to that one property.